What Parties Ought To Consider When Considering Arbitration Provisions

Originally published by the Daily Journal of Commerce on April 20, 2023.

When reviewing a proposed design or construction contract, the responding party will often do a cursory check to see whether the contract proposes arbitration or litigation for dispute resolution. So long as the proposed method generally aligns with that party’s preferences, it will not look further at the specifics of the proposed process. For the uninitiated, this can lead to surprises when a dispute arises, especially when it comes to issues like whether the arbitration will be held before a single arbitrator or a panel of arbitrators, the rules that will apply to the arbitration, and the scope of discovery.

Construction and design attorneys, on the other hand, spend many working hours (and sometimes nonworking hours) contemplating these exact issues. I have developed a checklist of items that I advise my clients to consider in their arbitration provisions. The combined goal of these considerations is eliminating surprises if a dispute arises and balancing efficiency with the desire for a fair process. Typically, that checklist includes the following topics:

Rules applicable to the arbitration

The parties may—and often do—agree in their contract to the procedural and evidentiary rules subject to the arbitration. Deciding which rules will apply to the arbitration—and whether there are any exceptions to those rules (such as for discovery)—is maybe the most important provision because a dispute could proceed under very different paths depending on the rules that apply.

For instance, the American Arbitration Association’s (AAA) Construction Industry Arbitration Rules provide for relatively limited discovery (i.e., pre-hearing document exchange and depositions). While this might be appropriate for smaller disputes, it rarely is appropriate for disputes involving large, complex construction projects. The Procedural Rules of the Arbitration Service of Portland (ASP), on the other hand, provide that the scope of discovery is the same as allowed by the Oregon Rules of Civil Procedure, which grant relatively broad rights of discovery. Thus, for disputes involving large construction projects, the ASP rules are in most cases better equipped to arm the parties and the arbitrator with what they need for a fair resolution.

Of course, as addressed below, the parties can also agree to conduct discovery pursuant to the Federal Rules of Civil Procedure or corresponding state court rules notwithstanding their agreement that the AAA rules (or ASP rules or those of some other body) otherwise apply.

Single arbitrator or panel of arbitrators?

Arbitrations may proceed before a single arbitrator or a panel of three (or more) arbitrators depending on the parties’ agreement or the rules applicable to the arbitration. A typical arbitration provision in a design or construction contract might provide for a single arbitrator for disputes below a certain dollar threshold and for a panel of three arbitrators for disputes above that threshold.

Because arbitrators are compensated by the parties for their time, arbitrating before a panel of arbitrators—as opposed to a single arbitrator—will add cost; it also will add scheduling difficulties that can push the final hearing out in search of dates that work for everyone. The parties can also agree in their contract to certain qualifications that an arbitrator must meet in order to serve. This is common in contracts involving highly technical or specialized construction. For instance, parties to an engineering, procurement, and construction agreement for a commercial solar array might agree that any arbitrator must have a background in the solar industry.

Scope of discovery

A belief has developed among many lawyers and arbitrators that one of the perceived benefits of arbitration—greater cost efficiency compared to litigation—can only be achieved when discovery is limited. AAA’s rules reflect this paradigm. The reality, however, is that in most construction disputes the documents—and particularly emails and text messages—tell the story. Thus, the party without those documents is at a significant disadvantage if the scope of discovery is limited in a manner that prevents a full and fair exchange of documentary evidence.

This issue can be avoided by prospectively agreeing that the scope of discovery will be governed by the Federal Rules of Civil Procedure (or alternatively the Oregon Rules of Civil Procedure or other state court rules in the jurisdiction where disputes will be heard). Recent amendments to the Federal Rules of Civil Procedure adopted a requirement that discovery be “proportional to the needs of the case”—thus baking into the rules a safeguard intended to limit abusive discovery practices while at the same time ensuring access to discovery based on considerations that include “the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.” An agreement that discovery will be subject to the Federal Rules of Civil Procedure has the dual benefit of guarding against runaway discovery costs that are disproportionate to the matters at issue while ensuring fair access to information.

Maximizing opportunity for resolution in a single proceeding

Rare is the construction dispute that involves only two parties. A typical defect claim might include claims by the owner against the design team and the contractor and subcontractors. For both efficiency and avoidance of inconsistent outcomes, it is often in the parties’ mutual benefit to have all related claims consolidated into a single arbitration proceeding. The agreements between the owner and the architect and between the owner and the contractor might include a requirement for a consolidated arbitration proceeding, but what if downstream contracts do not? One way to address this scenario is to include an off-ramp in the arbitration provision that gives the owner the right to elect consolidated court litigation in the event all necessary parties cannot be joined into a single arbitration proceeding.

These are just four of the many moving parts that are important to consider when agreeing to arbitrate disputes in a construction or design agreement. Owners, designers, and contractors would all be well served to give them more than just a passing glance.